New regime for compromise agreements from 29 July 2013

New regime for compromise agreements from 29 July 2013

Published:

Author: Kevin McCavish

Compromise agreements are to be re-named "settlement agreements" and pre-termination discussions will be inadmissible in unfair dismissal cases from 29 July 2013.

Compromise agreements re-named

Compromise agreements are used by employers to record severance arrangements with departing employees. The main feature of a compromise agreement is that it waives an individual's right to make a claim in the employment tribunal or court.

From 29 July 2013 the nomenclature will change as all references to "compromise agreements" or "compromise contracts" in relevant legislation will become "settlement agreements". This is really a change of style over substance but the Government believes the new wording better reflects the reality of such agreements.

Pre-termination discussions

At the same time, section 111A of the Employment Rights Act 1996 ("ERA") comes into force changing the law relating to the negotiation of employment exits. Currently, the common law "without prejudice rule" prevents any statements made during a without prejudice meeting from being used in a tribunal or court as evidence. However, this only applies if there is an existing dispute between the parties.

Section 111A of the ERA will allow greater flexibility so that confidential discussions can be initiated as a means of ending the employment relationship before any formal "dispute" has arisen. Section 111A will run alongside the existing without prejudice rule, which will continue to apply where the necessary conditions are met.

From 29 July a settlement agreement may be proposed by an employer before any other formal procedure, such as a disciplinary process, has been initiated.

Where a valid settlement agreement is concluded, an employee will be unable to bring an employment tribunal claim about any matter specified in the agreement. However, where a settlement agreement is not agreed, an employee may still bring a claim. If this relates to an allegation of unfair dismissal, section 111A will apply to exclude evidence about termination discussions.

Although pre-termination discussions may not be referred to in evidence in unfair dismissal there are some exceptions to the application of section 111A. Claims which relate to an automatically unfair reason for dismissal, for example, whistleblowing, trade union membership or asserting a statutory right are not covered by the new provisions. Other significant claims, such as breach of contract, wrongful dismissal, discrimination, harassment and victimisation, are also outside the remit of section 111A.

New ACAS Code of Practice on settlement agreements

Also on 29 July the draft ACAS Statutory Code of Practice on Settlement Agreements (the "Code") will become effective.

Failure to follow the Code will not make an organisation liable to proceedings or lead to an adjustment of any compensatory award, but the guidance in the Code will be taken into account by employment tribunals in relevant cases and failure to follow its recommendations could lead to adverse findings against the relevant party.

Section 111A will not apply where there has been "improper behaviour". The Code gives guidance on what constitutes improper behaviour. Where this has occurred, pre-termination negotiations will only be inadmissible to the extent that the tribunal considers it "just" to exclude such evidence.

The Code provides some examples of improper behaviour, including:

  • Bullying and intimidation through the use of aggressive behaviour or offensive words.
  • Physical assault or threat of physical assault or other criminal behaviour.
  • Putting undue pressure on a party, for example by not giving reasonable time for consideration.
  • Saying that if a settlement proposal is rejected, the employee will be dismissed.
  • Discrimination or victimisation on the grounds of a protected characteristic.

The Code does however say that the prohibition on improper behaviour would not prevent a party setting out in a "neutral manner" the reasons that have led to the proposal for a settlement agreement, or factually stating the likely alternatives if an agreement is not reached. An example would be the possibility of starting a formal disciplinary process where relevant.

The Code states that as a general rule, a minimum period of 10 calendar days should be given for the parties to consider the terms of the agreement and to receive independent advice, unless the parties agree otherwise.

There is no legal requirement to allow an employee to be accompanied at a meeting at which a settlement agreement is proposed. However, the Code states that it would be best practice for employers to enable employees to be accompanied at such a meeting by a work colleague or trade union official.

Comment

Settlement agreements may be proposed by either an employer or an employee and it is worth remembering that settlement agreements are voluntary and so even if one is proposed, the other party does not have to accept the terms within it.

While the initial proposal may be made orally, a settlement agreement must be made in writing in order for it to be legally binding. All of the other current requirements relating to compromise agreements e.g. the employee taking independent legal advice as to the terms and effect of the agreement, will remain in place.

Further information

For further guidance on settlement agreements and the requirements of section 111A ERA, please speak to your usual contact in the Shoosmiths employment team.

ACAS Code of Practice on Settlement Agreements